In Figure 8.7 (b) above, how much unemployment is due to sticky wages?

Question

BlackTom AI · Accepted Answer

First, let’s restate what the question asks: in Figure 8.7 (b), how much unemployment is due to sticky wages?

Option A: D0 - D1. This would represent the difference between the original and new demand curves (a shift in the demand curve). Unemployment from sticky wages arises not from a shift in demand itself, but from the quantity mismatch created when wages do not adjust downward to clear the labor market after demand falls. So this option misidentifies the source of unemployment.

Option B: S - D1. This notation would imply a difference between a supply quantity and a demand quantity at a certain point, or a difference between curves. But unemployment is typically depicted as the gap between quantity supplied and quantity demanded at the prevailing wage, not as a simple difference between a supply curve and a new demand curve. This option is conceptually off.

Option C: W0 - W1. This is the numeric difference between two wage levels. While sticky wages are about wages not falling from W0 to W1, the question asks for the amount of unemployment, which is not measured in terms of wage difference but in terms of quantities of labor. Therefore this option does not quantify unemployment.

Option D: Q0 - Q2. In the right-hand panel, with the demand curve shifting from D0 to D1 (due to a fall in labor demand) but wages not adjusting downward (sticky), the quantity of labor supplied at the prevailing wage is Q0, while the quantity of labor demanded is Q2. The excess supply of labor (unemployment) is therefore the difference between quantities supplied and demanded, Q0 − Q2. This aligns with the standard interpretation: unemployment due to sticky wages equals the gap between the number of workers willing to work at the prevailing wage and the number of jobs employers are willing to offer at that wage.

Thus, the unemployment amount caused by sticky wages corresponds to the difference in quantities of labor, specifically Q0 minus Q2. The other options describe shifts in demand, misinterpret wage differences, or mismatches that do not quantify the unemployment gap in this scenario.

SOC-ECONB Chapter 08 Unemployment Test

In Figure 8.7 (b) above, how much unemployment is due to sticky wages?

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